Cost-benefit lawsuits snarl Dodd-Frank implementation

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NEW YORK/WASHINGTON, (Thomson Reuters Accelus) – A financial industry lawsuit seeking to block new U.S. rules on commodity position limits on the grounds that they lack an adequate cost-benefit analysis could cause regulators to slow their implementation of the Dodd-Frank financial regulatory overhaul and be an indicator of more such challenges. Meanwhile, the Obama administration is saying it will resist efforts to block the law.

The lawsuit was filed last Friday by the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association against the U.S. Commodity Futures Trading Commission. It was filed in federal court in the District of Columbia.

“The Position Limits Rule as adopted by the CFTC was poorly crafted based on an incorrect reading of the law, and absent any sound economic or cost benefit analysis,” said ISDA CEO Conrad Voldstad, and SIFMA CEO Timothy Ryan in a joint statement. The trade groups, representing U.S. securities firms and international swap dealers, are concerned of the adverse impact of the rule on liquidity and price volatility.

“Generally speaking, regulators have historically paid lip service to cost benefit analysis” said Ira Hammerman, SIFMA senior managing director and general counsel. “This is not sufficient, as the law requires it to be done robustly for rulemaking.”

The day before the filing, Treasury Secretary Tim Geithner warned of “efforts to use cost-benefit analysis as roadblocks to reform, and other efforts to slow the pace of implementation of regulation in the hopes of watering it down.” He said the Administration is “going to fight to preserve” essential Dodd-Frank reforms.

Other obstructionist measures Geithner referred to include blocking the appointments of new regulators, cutting funding, adding policy provisions to funding bills and pursuing new legislation to repeal Dodd-Frank or key pieces of it. The White House also began a new campaign to confirm Richard Cordray as head of the Consumer Financial Protection Bureau, with a Senate vote Thursday, saying the lack of a director limits the agency’s authority over non-banks.

In a speech on Tuesday in Kansas, which signaled a new populist campaign, President Barack Obama said “the fact is that financial institutions have plenty of lobbyists looking out for their interests. Consumers deserve to have someone whose job it is to look out for them. And I intend to make sure they do. And I want you to hear me, Kansas: I will veto any effort to delay or defund or dismantle the new rules that we put in place.”

The CFTC final rule on position limits, passed in October, would limit the positions that investors may own in 28 commodities. The rule expands the scope of existing CFTC limits on futures and options contracts, to those in swaps based on agricultural contracts, energy, and metals, including gold, silver, crude oil, natural gas, and heating oil. The aim of the rule is to stop excess speculation across derivatives markets.

PROCEDURALLY FLAWED

The trade groups contend that the CFTC decision-making process, in enacting the rule, was procedurally flawed. They claim the regulator adopted the rule without making the required findings as to its necessity and appropriateness. This claims that the CFTC erred in concluding that the Dodd-Frank Act required it to establish position limits, without actually making this determination.

The suit also claims that the CFTC failed to conduct a meaningful cost-benefit analysis, as it is required to do by a separate statute, the Administrative Procedures Act. It cites a flawed CFTC rulemaking process that prevented public commenter’s from fully participating. The suit also referred to concerns raised by two CFTC Commissioners about the effect of the rule, which was reflected in their dissenting votes.

In September, ranking Republican U.S. Senator Richard Shelby introduced the Regulatory Responsibility Act, to require cost benefit analysis for new rules. It would mandate regulators to conduct “rigorous and consistent” economic analyses on all new rules that they propose, and is focused on rulemaking under the Dodd-Frank Act.

The bill requires regulators to provide a clear justification for rules, and determine the impact on economic growth and job creation. If a rule’s costs were found by analysis to outweigh its benefits, regulators would be barred from issuing it. The bill was sponsored by all Republicans on the committee, but no Democrats.

At a Senate hearing Tuesday on Dodd-Frank implementation, SEC Chairman Mary Schapiro conceded “analysis of the likely economic effects of proposed rules can be challenging. Certain costs or benefits may be difficult to quantify or value with precision, particularly those that are indirect or intangible.” She added, “in light of recent court decisions”, the agency is “examining potential improvements” in analysis used in rulemaking.

Schapiro said in September that the agency would not seek a rehearing of a U.S. Court of Appeals ruling against its shareholder proxy rule. In July, the appeals court vacated SEC rules to enable shareholders to nominate proxy directors. In its ruling on the 2010 case brought by U.S. Chamber, the court judged the rule violated the Administrative Procedures Act as it did not consider efficiency or impact on capital formation.

When asked about the possibility of future suits against other rules, Hammerman noted “in my eight years with SIFMA, this is only the second time we have brought a judicial action against a government agency.”

“The Dodd-Frank rules need to get done right. If a future rulemaking is material, and lacks a proper cost benefit analysis, or otherwise fails to meet what the law requires, we will consider all of our options, including judicial review.”

In context of SIFMA’s ability to delay and derail necessary regulation, it is informative to read The Bond Buyer article on “SIFMA: A Lobbying Powerhouse.” (see http://www.bondbuyer.com/issues/120_235/ sifma-powerful-lobbying-group-1033980-1. html)

All this suggests that it is high time the actions of SIFMA and Ira Hammerman in particular be subjected to intense scrutiny.